3 Commodities at Crucial Juncture

To look at the markets -- all of the markets -- you'd think we're on the precipice of another 2008-type unwinding.

Every market has taken it on the chin in the past several days, and some have literally gotten slaughtered -- municipal bonds, stocks and particularly commodities.

Two Commodity ETFs to Buy

I suppose this is to be expected. We have, after all, experienced quite a decent run in all of the capital markets in the last few months, particularly in commodities, and a sell-off can be part of the cycles of a healthy recovery, too.
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But now, many of the commodities are reaching very important technical levels and how they act as they approach these levels will tell the tale of whether this universal sell-off is part of the normal digestion cycle, or the beginnings of a more broad puking of assets.

Three commodities, I believe, will give a very strong indication of where we are going: crude oil, cotton and corn. All three have experienced very significant rallies: In the last three months, crude oil broke out of its trading range to see a high of almost $88 dollars a barrel, a rise of 22%. Corn saw a more spectacular run, seeing a recent high of $ 6.03 a bushel, a rise of 53%. And cotton was even more incredible, running to a high of $1.47 a pound, a gain of close to 80%.

The recent rise in all commodity prices is a close function of both the perception of investors to the hopes of an improving economy, as well as an indicator of real demand for raw inputs, both in the U.S. and the emerging markets of China and India.

And even though rising prices for commodities should have a sobering effect on other capital markets, they have become an unfortunate evil that has gone along with a recovering economy as well. How these commodities act as they reach very important technical levels on the downside will, I believe, tell the tale of whether we are in a moment of healthy digestion, or a bad case of indigestion.

All three of the commodities I mention are reaching their critical levels: oil, as I write this at 1p.m. on Tuesday is already there at $82.45 a barrel. Corn is next closest, with perhaps another few percent to run, trading around $5.50 with a technical area of $5.35 to be respected and cotton, having run the furthest, has still the most downside room left, trading around $1.34 with a technical level of $1.22 worth noting.

And it's not enough to see these commodities bounce off of these levels, if they attain them. The action of the market once these levels are reached and whether they are in fact breached will indicate to me where we're headed in other equity and bond markets.

As a very short-term trade, there might be an opportunity to try and capture a perhaps very fleeting bounce back in commodity prices. There are two fairly liquid commodity basket ETF's that allow investors to capture the prices of the two most popular commodity indexes: the iShares S&P GSCI Commodity-Indexed Trust ( GSG) and the iPath DJ-UBS Commodity Index ( DJP).

Both of these ETF's have many problems replicating commodity price movements, so in no way are these to be recommended as a long-term investment, but for a few days, it will certainly do the job. Just remember that most commodities' markets are at very delicate inflection points, with huge volatility, so a trade is all I am advocating here.

The commodity markets can be used as good evaluators of the broader asset markets, now under an extreme test. As cotton, corn and crude reach very important levels, look to these markets to give an indication of whether we are in the midst of a healthy pullback of an equity market continuing to gain strength, or at the beginnings of a much more difficult environment for stocks and bonds.
At the time of publication, Dicker had no positions in any of the equities mentioned.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.